Thursday, March 11, 2010

HOAs Consider "Reverse Foreclosure"

We just wrapped up our unit on promissory servitudes in my Property course.  As is the case every year, the discussion of Neponsit Property Owners' Ass'n v. Emigrant Industrial Savings Bank produced a lot of questions from the students.  Given that Neponsit concerns what are essentially homeowners' association dues, this time around I received a few questions about what HOAs might do to collect such dues on homes where the homeowners are in default with the bank.  (I have a pretty unique group this year, which includes a real estate developer, an HOA board member, a realtor, and a member of a local historic preservation commission, among many other interesting students.  A propertyprof's dream class!)

The problem, it seems, is that the bank will file a notice of foreclosure against the homeowner but will delay completing foreclosure because it doesn't want unmarketable, upside-down assets in its portfolio.  The defaulting homeowner usually stops paying her HOA dues, as well, and the indeterminate state of the foreclosure proceedings keeps the property in limbo.  HOAs are then stuck with unpaid dues, which affects community maintenance, etc.

A potential solution for the HOA was highlighted in this past Sunday's Miami Herald.  Apparently, several HOAs in Florida have started using a process called "reverse foreclosure" to force the bank's hand.  Under this procedure, the HOA forecloses on its lien resulting from the unpaid dues, takes title, and then renounces its claim, leaving the bank as the only player left to receive title.  Once the bank owns the property, it has to pay HOA dues (up to a certain capped amount).

I am always trying to teach students to be creative in their lawyering, and this provides a nice example of "outside-the-box" thinking to advance a client's interests.  But I also try to teach students that there are sometimes larger costs to pursuing legal remedies.  I wonder whether the HOA's long-term interests are ultimately served by this strategy, which promises to result in a higher number of displaced homeowners and an increased number of listed properties in an already saturated market.

Mike Kent

[Comments are held for approval, so there will be some delay in posting.]

P.S.  Thanks to Stetson law student Quincy Bird for bringing the article to my attention.

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